Human Capital Briefs

New Insights into the Finances of Older Americans

January 22, 2016

The most recent Society of Actuaries’ post-retirement risk research, released in January 2016, offers insights into financial shocks experienced by older Americans and into how older Americans perceive and manage financial risks.

The 2015 Survey of Post-Retirement Risks and the Process of Retirement was preceded by focus groups in both the U.S. and Canada conducted with retirees who were retired for 15 years or more and in-depth interviews with caregivers of retirees currently needing long-term care and retired 15 years or more. The focus groups were designed to understand how retirees were doing and how much they had been affected by shocks.

Some of the key findings with regard to shocks and unexpected expenses are as follows:

• The retirees are resilient and they are willing to make substantial adjustments in spending to manage. Many are managing very well, and overall they are doing better than some of the project team had expected.

• When asked about financial shocks and unexpected expenses, the two most frequently mentioned items are home repairs and dental expenses.
  
  
• Multiple shocks are a much bigger problem. About one in five retirees (19%) and 24% of retired widows experienced four or more shocks during retirement. In contrast, 28% of retirees and 13% of retired widows had not yet experienced any shocks.
  
  
• The problems were much greater for lower income retirees. 29% of retirees with annual income of less than $35,000 had experienced 4 or more shocks compared to 10% of retirees with income of $75,000 of more. The experiences and perceptions of retirees were quite different by income level in many different areas.
  
  
• More than one in three who experienced shocks had their assets reduced by 25% or more as a result of those shocks.
  
  
• More than one in ten who experienced shocks had to reduce spending 50% or more as a result of those shocks.
  
  
• About three in four retirees feel that they were able to manage within their new financial constraints at least somewhat well.
  
  
• Retirees were able to make adjustments and deal with unexpected expenses in a number of areas, but not major long-term care events requiring paid long-term care or divorce after retirement. Both of these shocks had a major impact.
  
  
• Those who purchased a Medicare supplement in addition to Medicare usually had their health care bills well covered, and they were not a surprise. Of course, they can pay substantial premiums, including Medicare Part B and D premiums, in addition to the supplement premium.

The survey results with regard to risk concerns and risk management are generally consistent with prior years. Some highlights are:

• The survey shows that the top concerns with regard to post-retirement risks are paying for long-term care, inflation, and health care expenses. These top concerns have been found over repeated iterations of the survey, although the order changes. This is the eighth biennial survey.
  
  
• Pre-retirees continue to be more concerned than retirees about most risks.
  
  
• Retirees continue to have retired substantially earlier than pre-retirees expect to retire. Working in retirement is another area where there is a repeated difference in perceptions of pre-retirees and actual experience of retirees. While pre-retirees say they expect to continue working longer, most current retirees have not actually done so.
  
  
• There continues to be gaps in planning and shorter planning horizons than the project team expected.
  
  
• Major risk management strategies being used are similar to what was found in prior surveys, with reductions in spending being a top strategy. Other top rated strategies include increasing savings and paying off debt.
  
  
• As in prior years, risk protection products other than health insurance are not very popular.

It is interesting to note that paying for both long-term care and health care remain on the ”top concerns” list, but the situation with regard to these two needs is very different. After age 65, Medicare covers nearly the entire population and most people buy supplemental coverage. There is no public coverage of long-term care except for Medicaid which offers coverage to those who have almost no assets and low income. Few people buy long-term care insurance and only about 10% of long-term care provided in the market is paid for with private long-term care insurance. Most long-term care is provided on an informal basis by family and friends. While the majority of people will ultimately need some assistance, only a small number need major long-term care support.

The research offers insights into how people planned in general, and particularly how they planned for shocks and unexpected events. The research showed that there is a lot of awareness of “regular monthly bills” and short term cash flow planning, but not much planning for less regular expenses that could be budgeted, such as home repairs and dental costs. As in prior studies, planning horizons are too short when we consider the rest of life and there are gaps in planning. Risk management products are not well understood and not used very much.

Employers can download the full reports from the survey and the focus groups from the Society of Actuaries’ website. Survey results include all questions and breakouts by income, health status and other groupings. A special report on shocks is one of several reports that will be issued later in 2016.

There are several areas for employer study and action suggested by the survey:

• In each of the surveys, there are substantial gaps between pre-retiree expectations and retiree realities. Employers can provide better information to help pre-retirees build more realistic expectations.
  
  
• Planning is often focused on regular monthly bills and not on expected but irregular expenses (such as a new roof), and not on risks. Financial wellness programs can help employees do better planning for cash flows and understand the need for emergency funds.
  
  
• For employees who do not have adequate resources to retire, employers can provide options to help them work longer. The survey results also call into question traditional definitions of adequacy and suggest that research to rethink what is needed may be helpful.
  
  
• Employers can also provide education about risk management products and access to more risk management products.

 

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